Capacity Still a Centerpiece of Concern

There is little surprise when a conversation about cannabis and insurance turns to the subject of capacity.

“Really when it comes to cultivation, processing, there is a bit of a hiccup, it seems in the overall market space, I think in terms of capacity from a property perspective for a total package solution,” said Keith Distel, casualty team leader in Admiral’s Chicago office and vice president of cannabis underwriting. “I know obviously the two of us are in kind of the same playing field when it comes to capacity. But capacity, it’s difficult. It’s limited.”

Distel was speaking during Insurance Journal’s annual Insuring Cannabis Summit on Oct. 14 on a panel titled “Cannabis Insurance Intelligence: The Essentials and Beyond.”

Distel’s comment on capacity was in answer to a question from moderator Charles Pyfrom, chief marketing officer at CannGen Insurance Services. The other panelists were Erich Schutz, a broker at Jencap Specialty Insurance Services focusing on the hemp and marijuana industry nationwide, and Alan Devey, a cannabis-focused producer out of Lockton Chicago who works with several publicly traded cannabis companies.

Distel blamed the lack of capacity on the continued status of cannabis as a controlled substance, making it illegal in the eyes of the government.

Editors’ Note: This is part of a series of articles from Insurance Journal’s annual Insuring Cannabis Summit on Oct. 14.

“It’s really putting a limit on capacity overall,” Distel said. “And so on the general liability side, what I see, especially a huge pain point, as operators grow by leaps and bounds every single year. The majority of our accounts that we work with are growing. They might be estimating sales at $2 million one year, and all of a sudden, next year rolls around, they have a handful more licenses, better capitalization behind them.”

Devey tied the capacity conversation in with his experience insuring special purpose acquisition corporations.

“When you look at these deals, obviously, you’ve got a private company doing a reverse merger into a SPAC and a lot of times it’s either ancillary businesses in and around the cannabis space, which if you follow some stocks, those are the SPAC deals that have done better historically than the traditional vertically integrated operators who have gone public via a SPAC vehicle,” Devey said. “So interesting to track but capacity is limited already in the cannabis industry. And when you tie a SPAC to it, it’s very difficult to place coverage, especially because a lot of the times these are being transitioned from a privately held company to being traded on multiple exchanges. And the risks are very difficult to quantify.”

Any IPO is “a huge magnifier on the risk” because the lawsuits will eventually come, he explained.

“It’s just a matter of when,” Devey said. “And so the carriers are almost signing their death wish to say, ‘Okay, is this what I want to sign on to?’ And these deals are just they’re very tricky, and it has caused a lot of trouble in the insurance market with the influx of SPACs both cannabis and non-cannabis.”

Schutz joined the conversation on capacity.

“We got a lot more capacity this year. And it’s still insufficient,” Schutz said. “And we’re having issues with certain placements when it comes to equipment breakdown. And it’s just getting a little bit more hairy. Crop coverage, we’re seeing some rate changes there. Again, crop coverage is limited peril. So still not the most robust product out there. And something that we’d like to see kind of strengthen over time as more entrants come in.”

Pyfrom described the difficulty of explaining to insurance buyers about the lack of capacity or certain lines of insurance.

“Honestly we’ve found with a lot of our buyers and brokers we talked to where they’ll say, ‘What do you mean it’s not available?’” Pyfrom said. “That shock factor is real, even though cannabis has been more than a decade strong, continue to be a force in the industry of an up and coming boom, where it’s attracting great operators and great executives from other industries to come over and say, I want to be part of this entrepreneurial venture that is cannabis, that’s doing a gazillion dollars in sales every year now. I mean, it’s real numbers.

Equipment breakdown, cyber, directors and officers and claims were other topics covered in the panel.

Schutz said the most common claim he’s seeing in cannabis is from theft, but other claims are making themselves known.

“But what I’m seeing in some of the markets where I am in Massachusetts, where risks are built very well, because of the regulations,” Schutz said. “So we’re not seeing as many theft claims as we are in other parts of the country. But uninsured EPLI claims, wage and hour, or other related issues, I’ve seen a number of those coming through, and thus far, unfortunately, all of them have been uninsured, as the take up on EPLI is still incredibly low. But I think our retailers really need to take a hard look at cyber and EPLI and consider putting that spend there.”

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Cannabis